Arcturus Therapeutics' (NASDAQ:ARCT) stock saw deep losses on May 27, in part because of spillover from news about patients in Moderna's (NASDAQ:MRNA) COVID-19 vaccine trial experiencing adverse reactions. Because both companies are working on COVID-19 vaccines, bad news about one affected the other.
After these losses, biotech investors are wondering whether it's time to buy on the dip and buckle up for the long haul with Arcturus, or whether it would be more prudent to cut their losses before they deepen. Likewise, many investors may be curious about how one company's clinical trial results could affect an entirely different company's stock so acutely.
When taking a long view of the market, it's clear that Arcturus is still worth an investment. In fact, unpacking the parallels between Arcturus's and Moderna's COVID-19 vaccine efforts shows that prospective investors in the former might soon have more than one opportunity to benefit from the latter's stumbles.
Arcturus' stock price is intimately tied to Moderna's clinical trial results
The market was doing something rational by associating Moderna's results with Arcuturus' future prospects. Arcturus, like Moderna, is an early-phase biotech that produces mRNA-based vaccines and therapies using a proprietary platform for therapeutic delivery. Between the two companies, Moderna has a far larger market cap -- $23.1 billion, compared with Arcturus's $823 million. Moderna also has dozens of mRNA programs in its pipeline, including eight infectious disease vaccine candidates, four of which are in phase 1 trials. These factors mean Moderna is significantly more experienced in the domain of mRNA drug and vaccine development than Arcturus -- and also that it has more resources.
However, neither company has an mRNA vaccine or therapeutic product on the market, nor does any other company. Because mRNA-based vaccines are scientifically unproven in humans, when Moderna posted in late May that its phase 1 trial for a COVID-19 vaccine had made some research subjects feel sick with side effects, investors were spooked. If the most sophisticated competitor in the mRNA space is having a problem, the market seemed to be saying, the entire domain might be vulnerable.
Serious phase 1 problems with Moderna's vaccine could be caused by the active ingredient -- the mRNA -- or potentially by the drug delivery platform. Either would be genuinely bad news for Moderna and also for Arcturus, as Arcturus' lipid-based delivery platform is similar to Moderna's on a technical basis.
However, thanks to the relatively low intensity of the reported side effects, the small size of the clinical trial, and a subsequent green light from the FDA to proceed to phase 2, Moderna's stock quickly bounced back even in the face of widely publicized insider sell-offs. Arcuturus, though, appears to have been left behind during the rally -- through no fault of its own.
Arcturus is still near the crest of the COVID-19 biotech investment wave
It may not yet have recovered from the sell-off, but Arcturus' stock is still more than 260% up from the start of the year thanks to heavy investment in biotech stocks spurred by the pandemic. Several signs point to the stock surging once again in the near future.
Earlier in May, fellow biopharma Ultragenyx (NASDAQ:RARE) exercised its option to buy 600,000 shares of Arcturus, bringing its total stake in the company to 14.6%. Ultragenyx justified the equity purchase by citing progress in Arcturus' COVID-19 vaccine candidate. Indeed, when Arcturus reported that its COVID-19 vaccine candidate was highly effective at eliciting an immune response in mouse models of the human immune system, its stock got a small bump. More importantly, Arcturus demonstrated one fewer barrier to moving its candidate into the clinic.
Ultragenyx's stake in Arcturus means Arcturus will have a somewhat larger and more developed company supporting its vaccine development efforts. While this is favorable for the company's prospects, it probably won't directly drive stock growth in the future, because the effects of the collaboration are already priced in.
Instead, look forward to Arcturus experiencing the upside of Moderna's vaccine development programs for COVID-19 as well as other infectious diseases. Each positive result in Moderna's programs lends a measure of credibility to Arcturus' scientific approach, and vice versa. If Moderna brings one of its mRNA drugs or vaccines to market, it'll be a strong validation of Arcturus' core science, and a large portion of the company's risk will abate accordingly. The reverse relationship is also in play, unfortunately.
Arcturus' fate is tied to Moderna's, and it may be the case that Arcturus' stock suffers more for Moderna's problems than it gains from Moderna's successes. Lastly, if Arcturus reports favorable clinical trial results for its COVID-19 vaccine candidate, its stock will get a durable boost, which should provide at least some reliable growth in the face of setbacks.
Investors seeking a bargain should grab Arcturus soon, while it's still off its highs. Importantly, though, investors with a lower tolerance for risk should probably wait and see how Moderna's trials proceed before investing in Arcturus, as Moderna's results may in some cases be a harbinger for Arcturus' future.